As the year winds down, it's time to look to the future — the distant one, where you're a carefree retiree kicking back on the beach with a margarita in hand.
Though that may still be a ways off, you can take action now to make sure you get there. Specifically, there are a handful of retirement moves you need to make before Dec. 31. Not only is this the perfect opportunity to make sure you're on track to reach your goals, but there's also a deadline you must meet.
"It's always important to use this end-of-year milestone and take advantage of anything left that you can do in 2020 and set yourself up for 2021," says Tyler End, a certified financial planner and founder of Retirable.
The 401(k) contribution deadline is Dec. 31
401(k)s and 403(b)s operate on a calendar-year schedule, so the last day to make those contributions for 2020 is Dec. 31. As a reminder, the contribution limit is $19,500. (If you're 50 or older, you can make catch-up contributions up to $6,500.)
If you can max out your 401(k) contributions through your employer, now is the time to do so. End says to contact your retirement plan administrator or human resources representative and find out how much you've saved so far this year. From there, adjust accordingly.
"Go in, see what the difference is, and then you can set your deferrals for your last paycheck to make that up," he adds.
According to Fidelity Investments, the average total savings rate — which takes both employer and employee contributions into account — for 401(k)s was 13.5% in the third quarter. The total savings rate for 403(b) accounts was 10.6%.
While you're already taking care of business, it's not a bad idea to set your deferrals for next year, too. The maximum 401(k) contribution for 2021 is $19,500. That divided by 27 paydays, assuming you're paid biweekly, is about $720 per check if you can afford to set it aside.
End says doing the calculations now is crucial.
"It's much easier to start and make that budget for the full year than to kick the can down the road for later," he adds.
The IRA contribution deadline is April 15
Speaking of later, you have until April 15, 2021, to contribute to your individual retirement account for 2020. The maximum you can put into an IRA is $6,000, plus an extra $1,000 if you're over age 50. Roth IRAs also have income-based contribution maximums.
Remember that you can only save earned income in an IRA, meaning real estate profits, interest, dividends and pension funds don't qualify. (If you have a spouse who has earned income and you file jointly, that works, too.)
Also note that these totals are for all your IRA accounts added together. You can't put $6,000 in a Roth IRA and $6,000 in a traditional IRA — it's $6,000 total. If you go over the IRA limit for 2020, you have to withdraw the excess by the time you file your tax return. If not, you'll be subject to a 6% tax on the excess.
One policy that's changed recently is that the age limit for IRA contributions has been eliminated with the passage of the SECURE Act. Previously, you had to have been under 70 1/2 to put money into a traditional IRA. Now, you can be as old as you want.
Overall, End says it's been a long, hard year, so "don't beat yourself up if you didn't meet your goals in 2020."
If you lost income or encountered financial challenges, take December to review the personal finance basics. Set up an emergency fund, stash away what you can for the future and chat with an expert to make a plan for 2021.
"Just start. Make that 1% 401(k) deferral at a new job, open up a Roth IRA instead of a regular IRA if you qualify for it," End adds. "Even if it's a small amount, getting started and getting those good financial habits back is the most important thing."